Pension Revamp Should Spur Upgrade in PZU’s View: Poland CreditMaciej Onoszko and Piotr Bujnicki
Poland’s rating should be raised if a planned overhaul of the nation’s pension industry results in the firms’ government bond holdings being canceled, the chief investment officer of the nation’s largest mutual fund said.
Under such a scenario, “public debt to gross domestic product will fall 10 percentage points and match the Czech Republic’s in two-to-three years,” Tomasz Stadnik, who oversees the equivalent of $6.6 billion at state-owned money manager PZU TFI SA, said in an interview on July 31. “This will create pressure for a rating upgrade.”
A drop of that magnitude in debt-to-GDP would give Prime Minister Donald Tusk room to stimulate the economy as it remains mired in a slowdown the central bank forecasts will be the worst in at least 17 years. While canceling pension fund bond holdings would curb market liquidity and increase the percentage of foreign investors holding zloty bonds in the short run, the longer-term benefits overshadow such concern, Stadnik said.
The yields on Poland’s 10-year bonds fell 14 basis points to 4.17 percent since the announcement of the pension system’s overhaul on June 26, with the spread over German bunds falling seven basis points over the period. The rate on similar Czech notes declined nine basis points to 2.27 percent.
Poland, ranked A- at both Standard & Poor’s and Fitch Ratings and at A2 by Moody’s Investors Service, has last seen its grade changed six years ago. The Czech Republic’s rating is three grades higher at S&P, two higher at Fitch and one higher at Moody’s. Poland’s debt reached 53.8 percent of GDP at the end of last year, while the Czech’s amounted to 43.9 percent.
“We still can’t comment on hypotheticals,” Jaime Reusche, a Moody’s assistant vice president in New York, said by e-mail on Aug. 2. Fitch is unable to respond for the time being, Janice Gayle, assistant to the head of global sovereigns and supranationals ratings, said in an e-mail yesterday. S&P didn’t reply to e-mailed questions from Bloomberg News yesterday.
The government plans to transfer assets held by pension funds to the state’s pay-as-you-go system amid efforts to bolster public finances. Among the proposals under consideration by Tusk is the cancellation of government bonds held by the funds. This amounted to 117.7 billion zloty, or 20.5 percent of outstanding bonds, as of June 30, Finance Ministry data show.
The cancellation of debt held by pension funds will increase the country’s exposure to foreign investors, which may destabilize markets and work against rating upgrades, according to Dariusz Lasek, the head of debt investments at mutual fund Union Investment TFI SA in Warsaw.
“The stability of the financial system will deteriorate,” Lasek, who helps oversee 7 billion zloty in assets, said in a phone interview yesterday. “From the point of view of rating agencies, this may be a factor increasing risk for the rating.”
Foreign investor holdings fell 2.6 percent to 201.9 billion zloty at the end of June from a month earlier, the Finance Ministry said on July 31. The sell-off came as Federal Reserve Chairman Ben S. Bernanke said on June 19 the U.S. central bank may reduce $85 billion of monthly bond purchases later this year and phase them out by the middle of 2014.
While Finance Minister Jacek Rostowski said in a May 22 interview that Poland shouldn’t pay “a penny more” on its debt than the Czech Republic, the premium investors demand to hold 10-year zloty bonds over similar koruna notes reached 197 yesterday, the most since July 17. It fell to 193 today.
The current structure of the privately-managed pension funds is a “gigantic burden on public finances,” Rostowski said on June 26. The cabinet will decide on the shape of the changes by the end of August, Tusk said on July 2.
The zloty gained 0.2 percent to 4.2054 against the euro at 5:43 p.m. in Warsaw, extending this quarter’s 2.9 percent rise, the best performance among the 31 major currencies tracked by Bloomberg. The extra yield on Poland’s dollar bonds over Treasuries declined two basis points, or 0.02 percentage points, to 142, according to indexes compiled by JPMorgan Chase & Co.
Poland’s credit-default swaps, contracts insuring the nation’s debt against non-payment, fell two basis points to 85, while Czech CDS stood at 64, data compiled by Bloomberg show.
If Poland cancels bonds held by the funds, an upgrade “seems warranted in 12 to 24 months,” PZU’s Stadnik said.